BoE Prints 75 Billion Quid as Unemployment Rises Faster Than Their Worst Year of 1971

Maybe the IMF was under estimating the recession in the U.K.

March 18 (Bloomberg) — U.K. unemployment rose at the fastest pace since at least 1971 in February, deepening the plight of Prime Minister Gordon Brown as he struggles to stop the economy’s downward spiral.

The jobless figure rose 138,400 to 1.39 million, the Office for National Statistics said. That’s more than the population of Cambridge and compares with the increase of 84,800 forecast by a Bloomberg survey of 20 economists. Separately, the Bank of England voted unanimously to print 75 billion pounds ($98 billion) in money in an emergency bid to shore up the economy.

With 15 months before he has to hold an election, Brown is losing support as companies from automakers to retailers eliminate jobs to reduce costs. The Bank of England this month cut the benchmark interest rate to almost zero and started buying government bonds to ramp up the money supply in an economy facing its worst recession in least three decades.

“It’s a huge, huge increase,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc. “These sorts of increases leave us very much on course for breaching 3 million this year.”

A broader measure of unemployment climbed above 2 million for the first time since 1997 and incomes grew at the slowest pace since at least 1991. The jobless total based on International Labor Organization methods last exceeded 3 million in 1993, when John Major’s Conservative Party was in power.

The pound fell and traded at $1.3901 at 10:11 a.m. in London compared with $1.3939 before the report.

Job Cuts

Thousands of jobs cuts at companies from Ford Motor Co. and GKN Plc to Vodafone Group Plc have taken unemployment to the highest level since the ruling Labour Party took office 12 years ago. Brown now faces the prospect of fighting the next election, which must be held by June 2010, with one in 10 people of employment age out of work.

“What we’ve got to say as a government is that we’ve got to take responsibility,” Peter Mandelson, the Cabinet minister in charge of business, said on GMTV today. “We take responsibility for digging our economy out of a mess that the failure of our banks has thrown us into. First of all, we have to restart global growth.”

Apology

As finance minister for a decade until June 2007, Brown is under mounting pressure to apologize for his role in the turmoil that has starved companies and consumers of credit, forced the government to take control of four U.K. lenders and led to the steepest drop in manufacturing in at least four decades.

Recent opinion polls give the Conservatives, led by David Cameron, a lead of as much as 16 points over Labour.

Brown is working with the Bank of England to rescue the economy. His government has pledged a 20 billion-pound stimulus package to help people through the slump and policy makers debated bond purchases of between 50 billion pounds and 100 billion pounds at their March 5 meeting.

Some economists nevertheless say that measures in the U.K. don’t go far enough.

While so-called quantitative easing will help end the recession, “it should have been done last autumn,” said Tim Congdon, economic adviser to former Chancellor of the Exchequer Kenneth Clarke in the mid 1990s. “Hundreds of thousands of jobs would have been saved.”

Claimant unemployment rose for a 13th month in February, the longest stretch since the 16-month period to June 2006. The increase in January was revised to 93,500 from 73,800. The jobless rate rose to 4.3 percent in February, the most since March 1999, from 3.9 percent in January.

Wage Pressures

Wage pressures subsided, with pay falling 0.2 percent in January from a year earlier because of the lower bonus payments, the first decline since records began in 1991. In the three months through January, wage growth slowed to a record low of 1.8 percent from 3.1 percent. Excluding bonuses, the pace slowed to 3.5 percent from 3.6 percent.

Group of 20 leaders meet in London on April 2 as the first global recession since World War II sends unemployment soaring from the export-reliant economies of Asia to European victims of the property bust such as Spain and Ireland.

American employers eliminated 651,000 jobs last month, pushing the jobless rate to 8.1 percent, the highest level in more than a quarter century.

The euro-region unemployment rate climbed to 8.2 percent in January. In Britain, the rate rose to 6.5 percent between November and January, the highest since the final quarter of 1997.

Is IBM worried over the recent CSCO announcement ?

March 18 (Bloomberg) — Sun Microsystems Inc. surged the most ever in German trading after the Wall Street Journal reported International Business Machines Corp. is in talks to buy the company for at least $6.5 billion.

Sun Microsystems jumped as much as 61 percent to 6 euros in Frankfurt trading. The offer would value Sun’s stock at more than double the closing price of $4.97 in the U.S. yesterday, the Wall Street Journal reported, citing people familiar with the plan. An agreement may not be reached, the newspaper said. Officials at Sun and IBM declined to comment.

Buying Sun would help IBM widen its lead over Hewlett- Packard Co. in the $53.1 billion market for computer servers. Sun is projected to post its third consecutive quarterly loss as Chief Executive Officer Jonathan Schwartz seeks to weather the global recession by slashing as many as 6,000 jobs and offering lower-priced products.

“It’s the war of the data centers, and an acquisition would leave only two or three players left,” said Robert Jakobsen, a Silkeborg, Denmark-based analyst at Jyske Bank A/S in Denmark. “The stock market has not been too good to Sun in the last 12 months,” allowing IBM to buy it at a discount, he said.

Paying at least $6.5 billion for Sun would be IBM’s biggest acquisition ever. The company bought Cognos Inc. for $4.9 billion last year to compete with Oracle Corp. and SAP AG in providing software that tracks corporate performance.

Fewer Deals

Sun Micro traded at 5.7 euros as of 10:04 a.m. in Germany. IBM declined as much as 1.13 euros, or 1.6 percent, to 68.8 euros in German trading.

Arlene Wainstein, a spokeswoman for IBM in Paris, said it’s company policy not to comment on reports. Shabita Wu, a spokeswoman at Sun in Taipei, declined to comment on the report.

Companies in the technology industry have announced $3.6 billion of acquisitions so far this year, less than a fifth of the value of takeovers they announced in the same period a year earlier, according to data compiled by Bloomberg.

The acquisition would be the biggest in the industry since Hewlett-Packard agreed to buy Electronic Data Systems Corp. for $13 billion in May last year, Bloomberg data shows.

Buying Sun Microsystems would boost IBM’s share of global server sales by 9.6 percentage points to 43 percent, widening the lead over Hewlett-Packard’s 30 percent, according to fourth- quarter estimates at Credit Suisse Group AG today.

Contacting Suitors

Dell Inc. ranked third in the industry with a share of 10.7 percent, followed by Sun and Fujitsu Ltd., according to the report. Global sales of computer servers will probably fall 17 percent to $44.2 billion this year as the global recession drives down demand and prices, according to the Credit Suisse report.

“The bigger you are the better things are,” Nguyen, who has a ”sell” rating on the stock, said Richard Nguyen, an analyst at Societe Generale Securities in Paris

In January 2007, an investment fund owned by Kohlberg Kravis Roberts & Co. bought $700 million of Sun’s convertible notes. James H. Greene Jr., a KKR general partner, has been on Sun’s board since last year. Sun founder and former CEO Scott McNealy is chairman of the company, and its single biggest investor, with about 14.1 million shares as of August last year.

In recent months, Sun Microsystems has contacted a number of technology companies with the aim of being acquired, people familiar with the matter said, according to the newspaper. HP declined the offer, the newspaper reported, citing a person briefed on the matter.

Payouts come sooner than expected

Hedge funds that locked up clients’ money last year have started paying out cash earlier than many had planned, in a move that could free tens of billions of dollars – and threatens another wave of hedge fund share and bond sales.

The repayments follow anger from many investors at the decision of hundreds, perhaps thousands, of hedge funds to suspend withdrawals, impose “gates” limiting withdrawals or create “side pockets”, which pay out only when assets can be sold.

“We’re seeing an increasing amount of hedge funds returning assets and reopening,” says Jean Keller, chief executive of 3A, the hedge fund of funds division of Banque Syz, the Swiss bank.

“By the end of June we anticipate that the vast majority of funds which suspended will have moved to the slightly better category of gated, which means that they’ve started making pay-outs.”

Hedge funds dumped hundreds of billions of dollars of shares and bonds in September and October as they sought to slash their borrowing and raised cash to pay redemptions, helping drive down markets.

Sales to meet redemptions this year are unlikely to be as large as last year’s, but could provide new downward pressure on markets.

Some funds began pay-outs far earlier than expected in an effort to keep investors happy, led by Tudor Investment Corp.

Tudor, run by Paul Tudor Jones, paid out redemptions from its continuing fund at the end of January, two months earlier than planned, although investors will not get back all the money in its side pocket for up to two years.

Since then pressure has been building on other funds to follow suit. Fortress Investment Group’s $8bn Drawbridge fund – which faced $3.3bn of redemptions – was one of the first, making a surprise payment in mid-February.

It still has $900m locked up in side pockets.

Now large numbers of funds are accelerating or preparing plans to hand back cash, investors say. These include Drake Management, the New York manager, Centaurus Capital in London, London Diversified Fund Management and many convertible bond specialists, including Howard Fischer’s Basso Capital in Stamford, Connecticut, and Jeremy Herrmann’s Ferox Capital Management in London.

Managers have been helped by an improvement in liquidity, or the ease of trading, in credit and bond markets this year as the panic felt in the wake of the Lehman bankruptcy recedes.

Some have also benefited from improved investor sentiment, with Israel Englander’s New York-based Millennium Partners and fellow New York fund DE Shaw both seeing many investors cancel withdrawal requests after deciding to appoint independent advisers to check and value their assets. The reduced levels of withdrawals means each investor pulling out could get a bigger proportion of their money back, investors say.

The overall amount of cash which had been held back from hedge fund investors is hard to calculate, but runs into the tens of billions of dollars, if not more.

According to Altin, a Zurich and London-listed fund of hedge funds managed by 3A, almost a third of its managers have restricted withdrawals in some way. Dexion Absolute, the largest listed fund of hedge funds, said just over one in six of the funds it invests in have imposed restrictions.

Other hedge fund investors say that between 10 per cent and 50 per cent of their managers are limiting withdrawals, with strategies such as credit and convertible bond arbitrage particularly hard hit. The industry ran $1,400bn at the end of last year, according to Chicago’s Hedge Fund Research, suggesting $140bn-$700bn of assets were at least partly restricted.

Funds imposed restrictions after being swamped with record levels of withdrawal requests last year, with $150bn leaving the industry in December alone, according to data published by TrimTabs Investment Research. Managers argued that selling liquid assets to raise cash to pay redemptions would damage investors who wanted to stay by leaving them with more hard-to-sell securities. Some were also close to breaching agreements with their banks on minimum size.

Managers are acutely aware that their standing with investors depends on the speed with which they repay capital.

“People will look at how they’ve been treated,” says Randy Freeman, co-founder of Centaurus Capital. Centaurus has changed the terms of its Alpha fund, which it is shutting, to speed up repayments to investors. “We could have sat on our hands and collected big management fees, but we decided not to do that.”

Investors remain concerned about some funds that have taken a very long time to return money, such as Drake. It was one of the first funds to suspend redemptions after hitting trouble in late 2007, and is still in the process of shutting down. It has promised not to charge fees after June, as it accelerates the closure of the fund, investors say.

3.8% contraction expected for ’09

Britain’s economy is set to keep shrinking well into next year, even after all or most of its leading competitors have begun to enjoy renewed growth, the International Monetary Fund will warn this week.

In a severe blow to Gordon Brown’s hopes for an economic revival to take hold by Christmas, the IMF will predict that the UK economy will shrink in 2010 by a further 0.2 per cent.

It now expects that to come on the heels of a brutal 3.8 per cent contraction this year that would be the sharpest since 1944 — and much worse than the 2.8 per cent that the fund forecast only in January.

The new, even harsher forecast comes ahead of official unemployment figures today that are set to show that numbers out of work soared above 2 million during January.

Mervyn King, the Governor of the Bank of England, last night warned of the danger of a return to an era of mass joblessness.

Speaking to bankers at the Mansion House in London, he highlighted the “extraordinarily sudden, severe, and simultaneous downturn of activity and trade in every corner of the world economy” since last autumn.

“Most of us have come from the generation that grew up believing that mass unemployment and world recession were things of the past, relevant to the history books but not the textbooks … That assumption is under threat,” he said.

The leaked IMF projections, outlined by a top adviser to Dominique Strauss-Kahn, the IMF’s managing director, will be greeted with consternation in Number 10 and the Treasury.

Government alarm will be heightened as the leak indicated that Britain is likely to be shown as the only leading economy not tipped to stage a recovery from recession next year.

The IMF is expected to project that while Britain’s GDP not fullout plswill keep falling over 2010 as a whole, the US economy will grow by 0.2 per cent, the 16-nation eurozone will eke out modest gains of 0.1 per cent, and the Group of Seven (G7) leading industrial economies will, as a whole, also grow by 0.2 per cent. The leaked forecast showed that Japan’s economy expected to stagnate during next year.

The scale of the toll from the global recession was underlined by the leaked details of the fund’s forecast, which officials in Washington said are set be further amended before release.

The updated projections show that the IMF now expects the world economy to suffer an outright contraction of 0.6 per cent this year, making this the bleakest since the Second World War. Britain is set to bear much of the brunt, with its economy now tipped to shrink by 3.8 per cent over 2009. That compares with predicted contractions of 2.6 per cent in the United States, 3.2 per cent in the eurozone, 5.0 per cent in Japan, and 3.2 per cent for the G7.

“This is a true global crisis, impacting all parts of the world,” Teresa Ter-Minassian, Mr Strauss-Kahn’s adviser, who outlined the new forecasts, said.

Mr King insisted that the Bank had taken drastic action to counter the impact of the crisis. “In its entire history, the Bank has never acted so swiftly or extensively in response to an economic downturn,” he said.

But he called for the Group of 20 key economies to agree decisive new measures at their London summit next month. He warned of a danger that, without collective commitments, countries could fail to factor in big gains from joint action, and so adopt an “excessively cautious approach”.

Mr King said that in the build-up to the present crisis, all forms of regulation, both light-touch and heavy-handed, had failed. Any overhaul of regulation faced the problem that “it is unlikely that there is a simple answer”. “We should not expect too much of regulation,” he argued.

The Governor said a new regime should “aim to be simple and robust” and avoid overly complex rules that would leave those in charge “lost in a morass or unnecessary detail”.

“We need to build into the system some simple and robust impediments to excessive risk-taking …” he said.

Condemning a huge build-up of leverage in British banks before the crisis that saw them lend more and more against ever less capital, Mr King backed expected moves for banks to be forced to build-up a safety margin of capital in good times to cushion them in tougher periods.

Enormous risks had been allowed to pile up in banks before the present crisis, the Governor said. He blamed this on a “massive increase in complexity” of financial products, and skewed incentives that had encouraged a lax attitude to the dangers.

“Banks felt that they had to keep on dancing while the music was playing,” he noted.

In future, banks should be forced “to bear the true cost of the risks they take”, he added.

Paulson takes care of his colleagues

NEW YORK (Reuters) – American International Group(AIG.N) funneled over $90 billion of taxpayer bailout funds to various U.S. and European banks, but the biggest beneficiary was politically connected Goldman Sachs Group Inc (GS.N).

Suspicions of potential conflicts of interest and favoritism have been fueled by $12.9 billion AIG paid to Goldman Sachs — where then-Treasury Secretary Henry Paulson had previously worked as chief executive — in the months after the insurer was rescued by the government last September.

Goldman, for its part, has insisted it did not need the bailout money because it was “always fully collateralized and hedged.”

Long Wall Street’s largest investment bank before it recently became a bank holding company, Goldman answered a series of questions from Reuters about the bailout funds.

“We can say that our notional exposure to AIG is a fraction of what it was at the time of the September bailout,” Goldman spokesman Michael DuVally said.

Asked why Goldman Sachs took $12.9 billion of taxpayer money if it was collateralized and hedged on its AIG positions, DuVally said it was because AIG was not allowed to fail, so Goldman did not get money from hedges that would have paid out if the insurer had collapsed. And, he said, under the terms of its contracts with AIG, Goldman was entitled to collateral.

DuVally also said the bank does extensive due diligence on all its counterparties.

How much Goldman and other counterparties received from AIG has been just one of several flashpoints over the taxpayer rescue of what was once the world’s largest insurer.

AIG has also infuriated politicians — including U.S. President Barack Obama — with its plan to pay $165 million in bonuses to employees at the unit at the heart of its problems.

Still, the payments to counterparties like Goldman Sachs dwarfed the bonuses, and some experts contend that these companies should have been made to share some of the losses resulting from the giant insurance firm’s near collapse.

“People see that the guys that ruined AIG are getting paid more money, and that creates outrage,” said Porter Stansberry, managing director of Stansberry & Associates Investment Research. “If you want to be outraged, be outraged that the counterparties got paid out full value.”

Goldman was not the only large bank with exposure to AIG. The list of counterparties that AIG disclosed on Sunday included others that got large sums. Goldman was followed by Societe Generale (SOGN.PA) with $11.9 billion, Deutsche Bank (DBKGn.DE) with $11.8 billion and Barclays PLC (BARC.L) with $8.5 billion.

Moreover, the AIG disclosures are still incomplete in that they do not include payments to the banks since December 31.

“We are looking at a small piece of it right here. So what is the total exposure? That’s the question. And then the issue is, well, if that was wiped out what would it do to Goldman’s capital?” said Campbell Harvey, a finance professor at Duke University.

“It is obvious that firms underestimated the counterparty risk. That was their mistake,” Harvey said. “Yet they are getting bailouts of U.S. taxpayer money. Why should we pay for their mistake?”

In an editorial on Tuesday, the Wall Street Journal pointed to Goldman’s claim that “all of its AIG bets were adequately hedged and that it needed no ‘bailout.'”

“Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts,” the Journal said.

The bailout has stirred resentment not just in the U.S. Congress, but on Wall Street, where investors have speculated that Goldman and its connections helped it get a better deal.

In recent years, many former Goldman executives have moved into government. Paulson left Goldman in 2006 as chief executive. The chairman of the New York Federal Reserve is former Goldman Chairman Steve Friedman.

“The person that should be subpoenaed is Hank Paulson. How do you go from running Goldman Sachs in ’05 and ’06 and making all of these bets with AIG’s financial products unit and then end up in the government guaranteeing those bets and not have a conflict of interest?” Stansberry asked.

DuVally said Goldman Sachs was not party to any discussions about the bailout of AIG.

MA consider more emerging market investments

PURCHASE, New York (Reuters) – MasterCard Inc (MA.N), the world’s second largest credit card network, may increase investments in emerging markets despite the global financial crisis, its CEO said on Tuesday, adding that the U.S. economy could start recovering by the end of this year.

President and Chief Executive Robert Selander said in an interview that Brazil and China are among the markets where he expects strong growth opportunities. Both countries, with huge populations and a low penetration of credit and debit cards, are part of MasterCard’s 15 biggest markets. Those 15 markets constitute 90 percent of the company’s businesses.

“We are making investments in some of the emerging markets where we continue to see growth. We will probably increase some of those investments as the relative growth rate in those markets is better than some of our more mature and struggling economies,” Selander said.

Emerging regions from Asia to Latin America have reported double-digit growth in gross dollar volume in credit and debit transactions in the fourth quarter, while they fell 5 percent in the United States.

Selander said it was a priority to expand MasterCard’s debit business, seen as the fastest growing electronic payment tool.

“We are working hard on debit. If you think about conquering cash and checks, which is our principal competition, that is going to be done more by debit than is probably going to be by charge or credit,” Selander said.

Debit is still a small part of the company’s business, with credit transactions representing around 70 percent of its gross dollar volume.

LIGHT AT THE END OF THE TUNNEL?

MasterCard is partially insulated from the credit crisis because it processes transactions rather than lends.

However, the company, based in Purchase, New York, has reported a slowdown in transactions as consumer spending declines and the global economy deteriorates.

MasterCard posted higher-than-expected quarterly earnings in February, helped by lower expenses and an increase in the fees it charges banks.

Selander said he believed “things will get worse in some of the economies before they get better”.

“Unemployment will continue to rise in the United States and probably in some of the Western European countries,” he said.

“We’re going to continue to see housing prices fall. We are going to continue to see challenging volumes of consumer spending in terms of retail sales,” Selander said.

But he forecast that the U.S. recession should ease by the fourth quarter of 2009 or the first quarter of 2010, boosted by government efforts to stimulate lending and changes in the behavior of banks and consumers.